• As Bitcoin’s prolonged bull market becomes the ‘new normal,’ institutional capital wants in to mining
  • Mining operations are migrating to North America from China and profiting from inefficiencies on its power grid

Institutional money is no longer just interested in Bitcoin — it wants to invest in its means of production. Although Bitcoin mining is as profitable as ever thanks to the continued bull market and a stalwart revenue stream from transaction fees, it’s also harder than ever with an all-time high mining difficulty rate as well as a global shortage of silicon.

But it’s also an environment rich with opportunity for investors, especially as the industry transitions to North America away from a geographical base in China. 

According to Mike Colyer, CEO of Digital Currency Group’s mining infrastructure firm Foundry, the Bitcoin mining industry market is changing. No longer are miners just looking to profit from the sale of their mined coins, but also from the increasing transaction fees which hit an average of $34 million a day in late January. All the while there’s a push to distribute hash power around North America, taking advantage of inefficiencies in the grid and the prevalence of “stranded power”. 

“Institutional money has arrived for mining,” Coyler told Blockworks in an interview. “The Bitcoin mining space is opaque, and it’s hard to understand how to navigate the industry. That’s something that Foundry is working to solve for institutional investors and there are deep pockets of capital looking to invest in mining infrastructure.”

So far China has dominated the industry because of its proximity to the mining hardware supply chain. For the industry, it’s a concern that one country has such comprehensive vertical domination from the manufacturing of mining equipment, to the operation of the farms themselves.

According to the University of Cambridge’s hashrate map, during the second quarter of 2020 China controlled 65 percent of the world’s hashrate, a measure of Bitcoin’s processing power. That seems high, but the percentage is down from 7 percent during the third quarter of 2019.

The U.S. meanwhile is slowly gaining ground, up from 4 percent during Q3 2019 it’s over 7 percent at the current day. 

There’s certainly an eagerness to see this number increase. China is making life for the crypto industry more difficult by the day: according to reports with the closure of most OTC trading services in-country, it’s difficult to exchange crypto assets for Renminbi at a reasonable rate. Exchanges are forced to sell their holdings for a foreign currency abroad, then exchange that for RMB dramatically adding to their overhead. 

Investing is More Than a Supply of Capital 

As mining jumped from a “hobby” to an “industry,” it is increasingly being perceived as critical internet infrastructure, according to Phil Gomes, a spokesman for Titan. With this, Gomes says, comes mining companies going public and a notable uptick in professionalism. 

Foundry’s Coyler also points out that while the deep pools of capital found on the public markets can help with financing mining equipment, financiers can also get creative in helping match up miners to not just money but partners. Coyler recalled one deal where a U.S-based power plant operator financed the construction of a Bitcoin mine next to the plant that will utilize the excess power until demand from the surrounding area’s growth meets the supply of power available from the plant.  

Bitcoin Miners’ Next Challenge

Although there are tremendous advantages to a public listing for mining companies, it also comes with the challenge of needing to convince the market that these companies are a macro proxy for the long term potential of crypto, and not just a reflection of daily trading volatility. After all, the current trend is for an almost twice-weighted decline of these stocks compared to the price of Bitcoin. 

This isn’t exactly an easy task. But as more and more institutional investors build their exposure to crypto, with Ivy League endowments being the latest, the market should be able to look beyond miners as a price proxy and rather a long-term infrastructure play

  • Blockworks
    Reporter
    Sam Reynolds is a reporter for Blockworks, covering how regulations impact the institutional crypto market in Asia and beyond.